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US Equities Stalled, European Shares Brighter

US markets absorbed more negative data on Friday and the DOW JONES recorded a second consecutive week of losses as European markets trembled but looked for a brighter future. European shares slid for the second straight day but investors continued to take money for US markets and invest in European markets. Flows into European equities from US funds reached a two-month high in the week ending August 14, 2013. Trading has been light for most of August.

Federal Reserve policy is dictating market stability and speculation that tapering will commence next month weighs heavily on investors. Markets anxiously await the Federal Reserve policy meeting on September 17-18. US equities still show significant gains for the year but European markets are mounting a rally while th FTSEurofirst 300 and Euro STOXX 50 have gained about 8 percent year-to-date and posted gains for the second consecutive day.

By noon, the DOW was down 32.33 points, off 0.21 percent to 15,079.86. The S&P 500 Index was off 5.61 points or 0.34 percent at 1,655.71. The Nasdaq showed a gain of 1.67 points to 3,609.79, a 0.05 percent gain. The FTSAE Eurofirst 300 index jumped 0.03 percent. On Thursday, equities suffered the largest one-day drop since late June. On Friday, the MSCI’s road emerging equities lost 0.5 percent.

Friday’s economic data from the US was less than  encouraging.

On Thursday, a report indicated rising confidence among American single family property owners. The confidence level struck an eight-year high. However, the rapidly rising long-term interest rates has taken a tool on the resale marketplace.

New start for single family homes dipped 2.2 percent in July. However, starts for two-family home spiked 26 percent, completely reversing a downturn in June. July permits for multi-family homes increased by 12. 6 percent while approvals for single family construction slumped 1.9 percent. Overall, July permits climbed to 943,000 units, slightly below projections of 945,000. Housing starts reached an adjusted rate of 896,000 units.

The residential marketplace and new construction is one large factor in projections by JPMorgan and others that growth in the third quarter will reach 2.7 percent.

The overall consumer index reading from the Thomson/Reuters/University of Michigan survey slipped to 80.0, slight underneath July’s six-year high of 85.1. The August reading was the lowest in four months.

Currency Markets

US Treasuries have been volatile. Sparked by surges in British sterling and in the German bund, US notes have been erratic. The benchmark 10-year bond has risen by 1.6 percent since May. On Friday, the 10-year Tresaury was down 25/32 with a yield of 2.8564 per.

The climb in yields drove the dollar up against major currencies. Emerging currencies continued to slide. India’s rupee touched a record low a 62 per dollar. Year-to-date losses are 11 percent. The dollar rose to 97.62 yen. The euro slipped 0.1 percent to $1.3328.      

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Euro, Dollar Strengthen

The dollar drew support from a boost in manufacturing and strong housing gains to spike consumer confidence. Meanwhile, the euro posted surprisingly improved manufacturing as Germany recovered nicely from recent fluctuations. While earnings from giants Caterpillar and AT&T disappointed, US equities only suffered minor losses after reaching historic intraday highs on Tuesday. Gold suffered its first setback in four days.

Equities in Europe sustained reasonable gains on Wednesday. Manufacturing across the 17-nation euro zone indicated that the region’s 17-month recession shows sign of easing.

The news was welcome relief for a market that has become increasingly fixated on unenthusiastic economic data from China and the volatile performance of Japan’s stock market. Chinese manufacturing contracted for the third consecutive month in July and plateaued to an 11-month low.

The US housing report showed existing home sales climbed to a 5-year high in June. Sales spiked despite an increase in lending rates. Conversation in Washington indicated that lending standards might ease for first-time homebuyers, a necessary commodity for a full housing recovery.

US Equities

The Dow closed off 25.50 points settling at 15,542.24 down 0.016 percent. The S&P 500 Index dropped 6.45 points, off 0.38 percent to 1.685.94. The Nasdaq Composite Index closed at 3,579.60 down 0.33 points.

Caterpillar lost 2.4 percent to $83.44 after disappointing quarterly returns and a downward projection for the rest of the year. AT&T lost 1.1 percent to $35.40 as mobile service sales failed to meet projections.

In after-hours news, Facebook reported stronger than expected revenues lifting the stock 15 percent to $26.51.

European Equities

Europe’s FTSEEuroFirst 300 Index held on for a 0.6 percent gain, closing at 1,214.63. Technology had pushed the market higher earlier in the day. Apple’s 6 percent gain to $443.86 put the stvck at its highest level since June 10, 2013.

The MSCI world equity index fell o,25 percent to 375.09. The market suffered from the weak Asian data.


US Treasury yields rose on the strength of the new data and sentiment that the Fed will begin to taper its stimulus. The yield on the benchmark 10-year note jumped 2.581 percent but a Wednesday sale of 5-year notes met with weak demand.

The dollar index gained 0.4 percent to 82.272 on strong momentum just before the close. The gains ended three days of losses.

The euro dipped from a one-month high of $1.3256 to 0.2 percent lower. The euro closed at $1.3198. Volume on the euro/dollar pair reached $4.6 billion in heavy trading.

German and French consumer sentiment polls surpassed expectations creating heavy trading of low positions. The French and German PMI was in sharp contrast to sentiment in China.

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British Sterling In Jeopardy

US Equities looked to be turning down for the first time in over a week after European equities closed with modest gains. The euro shed 0.6 percent settling at 1.3035 as the dollar gave ground to the yen falling 0.27 percent to 96.01. Earlier in the session, the dollar had climbed to its highest rate against the yen since August 2009.

Oil continued to climb rising to $111 a barrel. US oil rose to $92.97 per barrel as crude rose by 5 cents to $110.27.

By noon EST, the Dow Jones Industrials Average was trending lower. The S&P 500 was off 4.13 points at 1,553.09. The Nasdaq was down 15.00 points to 3,237.87.

British Sterling Falls Further

The news from the UK was discouraging and plummeted the pound to 20 month lows with little hope of an immediate lifeline. Sterling fell to a 20-month low against the dollar to $1.4832.

The most damaging data came from the UK’s January manufacturing output. The decline marked the fasted downward spike since June 2012. Analysts expect the downward slide to continue as there is not economic data to suggest any strength.

Of late, sterling has suffered due to the nation’s credit downgrade and very low levels of economic growth. The UK is locked in many positions contrary to the members of the European Union and the natives are restless. The Bank of England has discussed the need for more quantitative easing which could sink the currency further.

The euro continued to rally against the pound reaching a two-week high at 88.77 pence, closing in on the 16-month high of 88.15 met on February 25. The BoE reported that losses against the dollar and the euro forced the sterling’s trade-weighted index to 77.9, a 20-month low.

Chief FX options strategist at Barclays Capital explained the dilemma facing the BoE. “If economic data continues to remain weak, like we saw today, it could make it easier for the BoE to loosen policy. Although our base case is for no more quantitative easing from the BoE just yet, it is a very finely balanced call.”

A serious problem for the Brits is that the spreads between the two-year US bond yields and the British two-year bonds are leaning toward the US, which, in turn, keeps demand for the dollar restrained. Market analysts observe that investors are selling sterling in favor of the dollar, not the euro. The US economic outlook is more stable that the euro.

2013 Performance Weak

The British pound has fallen 8.3 percent against the dollar and 7 percent against the euro. Sterling is the worst performing of the established currencies this year.

Minutes from BoE meetings indicate there is little reason to be optimistic about the economic trend of the UK. The most common opinion is that Chancellor George Osborne will give the BoE more latitude with inflation constraints, paving the way a period of quantitative easing and asset purchases.

The fear is that the Fitch ratings agency will follow Moody’s lead and also reduce the country’s credit rating. Neil Mellor, the Bank of New York’s currency strategist, said; “There are concerns on just about every front for the UK, political concerns, whether there will be another downgrade, the budget and whether or not we will see more monetary stimulus, everywhere you look there is a negative for sterling.” Expect more decline as the euro and dollar continue to stabilize.

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ECB and Non-Farm Payroll Boost Euro

Momentum from Mario Draghi’s announcement regarding the ECB’s upcoming bond buying spree helped take the euro to four month highs against the dollar. A weaker than expected Non-Farm Payroll Report neutralized US equities and sent the dollar lower. The Labor Department’s report fell far short of ADP data submitted Thursday and below analyst expectations.

The economy generated 96,000 new private sector jobs in August. The projected number of new jobs was 125,000.  ADP had indicated the addition of 225,000 jobs by the private sector in August. Number of hours worked was also down. New claims for weekly benefits fell to the lowest level in a month.

The upbeat focus yesterday was dimmed on Friday but many investors feel the most recent job report gives credence to the need for QE3. The Federal Open Market Committee will hold a two-day meeting starting on Wednesday. The likelihood of new stimulus will be the featured topic. Investors believe that the program could be announced as early as Thursday.  QE3 is a highly controversial package.  The stimulus will weaken the dollar, boost equity markets and may not have enough clout to influence the overall economy.

The euro climbed to $1.2806 before settling at $1.2782 at midday. The USD fell to 80.263 against a basket of currencies. European equities continued to rise as the FTSEurofirst 300 rose to 1105.73. Yield on the 10-year US bond was up the 1.6215 percent.

In the wake of Draghi’s announcement, both the yields on Spanish and Italian debt hit 4-month lows as gold futures climbed to $1,737.30, another four-month high.

In the euro zone, a critical decision from Germany’s high court regarding the legality of the Bailout funds for euro zone members will be announced next week. Experts predict the court will vote to support the release of much needed funds but it is remain a hot topic of debate in the homeland. Germany was the lone dissenting nation in the ECB’s vote for unlimited bond buying.

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Euro Zone Under Siege

The Euro Zone’s debt crisis has woven its dangerous web into every component of the region and has stirred a familiar brew that the euro may be finished as a regional currency.  Wall Street returned to work on Tuesday after a weekend of dissent in Europe where the region’s financial institutions showed overall weakness.

The Deutsche Bank, Germany’s largest and most powerful bank, has lost one third of its capitalization in the last thirty days.  Sovereign debt in Portugal, Italy, Spain, Ireland and Greece has pressured the other euro members and raised serious issues about growth in the region.

The bottom line reality is that the region is in great divide and the possibility of regional or even national growth has been greatly reduced.  Without growth, economic and financial chaos will intensify.  Without the spirit of cooperation, the euro cannot survive. 

Equities in Europe were down 4 percent on Monday.  On Tuesday, the European equities fell another 4.2 percent to its lowest level in over two years. 

Meanwhile, in the U.S. major banks are faced with big lawsuits.  On Friday, the Federal Housing Finance Agency sued the 17 largest banks in the country.  Reportedly, banks are in negotiations with the government to contain the damage.  However, US financials led the Tuesday selloff. 

The euro fell below the $1.40 mark and may slip even further in upcoming days.  The world is anxiously awaiting President Obama’s address before the full Congress on Thursday night.

When Boehner and Cantor Speak, Markets Tumble

Probably the worst news was a request that Speaker of the House Boehner and Majority Leader Eric Cantor asked for a meeting with the President before his Thursday evening speech.  The current Congress has hit new lows in terms of popular opinion.  The approval rating of Congress is 12 percent.  In one poll, Americans were asked if they had the opportunity to vote, would they vote to throw every member of Congress out of office.  More than 54 percent of respondents answered yes.

Most Americans remember how Boehner was too busy to return phone calls to the President during the debt ceiling crisis.  These same Americans are hopeful that Obama will put his own comprehensive jobs program including infrastructure improvements, green technology development and technology origination programs on the table. If it is necessary to increase revenue to fund these job programs, then put the proposals on the table and let the Republicans in the House sign their own death warrants by turning it down.

If the President accepts a meeting with Cantor and Boehner, he should not be influenced by anything they have to say.  There is only one thing that matters.  That is job growth. Job growth translates to GDP growth, which justifies the expenditures.

What the recent poll shows is how dysfunctional the Tea Party led Republican Party has become.  These are individuals who have placed party politics ahead of the people’s interests.  If the President’s message is not aggressive enough or if Congress votes down a solid plan, the stage is set for massive protests and outright mutiny.

Simply put, taxpayers do not like and do not trust either Boehner of Cantor or the Tea Party.  As one taxpayer recently angrily asked a Republican, “are there any other deals, like the Norquist pledge, that you have signed on our behalf?”

American taxpayers are angry with Obama for not paying enough attention to the economy.  However, more than 45 percent of Americans like the President.  If he is straightforward to his principles and can act as decisively as he has on foreign policy, he will regain the people’s confidence.

The President should no longer trust Republicans.  They are responsible for the malaise in Washington.  As a group, they do not deserve respect or the people’s time.  There single purpose has nothing to do with the welfare of the nation.  That, Mr. President, is up to you.  “These are serious times and we need serious people to solve our problems.”  That clip from The American President is very appropriate when the House Republicans are involved.

Although the recent non-farm payroll report is hard to swallow, the fact is that the private sector is adding jobs as the Republican inspired spending cuts are eliminating government jobs.

Mr. President, stand firm.  Put your program on the table, do not extend the Bush tax cuts, that have not added jobs as Republicans state and do not compromise on the principles that we, the People, voted for.  Bring American corporate earnings home. 

We the People support you and will make sure the decks are clear of Tea Party interference and Norquist supporters as soon as possible.  Show us the way!

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EU Fragmented Before Summit

Recent developments by Moody’s Credit Rating Service have created alarm in the euro zone that will likely be the topic of conversation at the European Union Summit over the next two days.  Belgium is the latest country to suffer a credit rating paring at the hands of Moody’s, but the travails of Spain and Portugal present immediate and substantial problems.

Hardly a unified front, there exists deep differences between EU members on how to proceed.  With rioting in the streets of Greece and discord in Ireland’s parliament, tempers are running short throughout the zone. 

The two largest euro zone economies, France and Germany, are taking a “wait and see” approach to the debt crisis.  German Chancellor Angela Merkel has been especially critical of the European Union’s push to raise more money to fund the EU/IMF joint loan facility.

Merkel and EU Chairman, Jean-Claude Juncker, have clashed publicly over the concept of issuing euro zone bonds.  Merkel suggested that her talks with Juncker had ruled out the possibility but analysts suspect Junker may raise the issue in the upcoming, year-end summit.

Meanwhile, Junker issued a warning to Spain and Portugal saying, “They would do well… to present structural reforms to be introduced beyond the plans of consolidation already announced.”  Both Spain and Portugal have been subject to increased pressure in bond markets.

Spain and Portugal  

The yields on Spanish 10-year bonds rose sharply on Wednesday.  The euro fell against the dollar as European equities also turned down.

Portugal announced intentions to cut through the red tape and enable economic growth.  The country also will adopt quarterly fiscal goals to go along with its planned austerity cuts.

On Wednesday, Portugal sold 500 million euros of three-month treasury bills at a punitive rate of 3.4 percent.  Last month the rate for the same volume was 1.8 percent.

Cash strapped Spain has 275 billion euros of sovereign debt and bank debt due to expire in 2011.  The country has vowed to implement huge spending cuts that will virtually affect every aspect of the country. 

The Moody’s warning to Spain specifically mentioned the high cost of debt servicing and the state of the national and regional banks as the basis for a possible downgrade, which seems imminent.  Moody’s fell short of suggesting that a EU bailout was necessary.

Arnaud Poutier, deputy head of IG Markets France, issued the following summary, “Europe remains very fragile.  Everyone sees a major crisis in the first few months of 2011 that would coincide with Spain’s refinancing operations.”


Ireland’s beleaguered Prime Minister Brian Cowan gained support in Parliament for the 85 billion euro bailout from the IMF/EU fund.  The first disbursement is expected early next week.

Approval of the bailout and the strict austerity cuts imposed on the country have created waves of opposition.  Cowan is expected to be voted out of office in early elections next year. 

The opposition has said there is no moral or legal obligation to honor Irish bank obligations to shareholders.  The opposition party has said they will attempt to renegotiate the IMF/EU loans.

EU Discord

On Tuesday, Standard and Poor’s lowered the rating of Belgium’s sovereign debt.  The credit agency warned of another downgrade in six months.  Not surprisingly, Belgium Prime Minister, Didier Reynders, pointed to a doubling of the EU’s 440 billion euro portion of the loan facility.

Most of the euro zone members do not expect any decision at this time.  Merkel has said that only 10 percent of the fund has been used to date and that an increase in the member contributions would lead to unrest in the global currency markets.

However, European Central Bank President, Jean-Claude Trichet is expected to support an increase in the fund.  The ECB has come under pressure to increase its bond-buying as the zone peripheral countries struggle to manage their debt.

On Thursday, Switzerland, a leading trader in the zone, held interest rates at current levels in efforts to stabilize euro zone economies.  Despite the euro’s instability, Switzerland continues to prosper.

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U.S. and European Equities Keep Climbing

Equity markets in the U.S. appeared ready to post solid gains for the fourth straight day.  Buoyed by stellar quarterly earnings from Dupont and other major U.S. companies, the DOW appeared ready to post another triple digit gain.  Historically, the DOW has never had four straight days of triple digit gains.

Dupont’s strong sales figures from every division surprised analysts.  The company immediately raised annual projections and raised expectations for several key divisions.  Overall, U.S. business has posted strong quarterly reports, but the Consumer Confidence report, issued Tuesday morning, turned down from June’s adjusted 54 percent to slightly over 50 percent in July.

The fear surrounding U.S. companies is how the profits are being generated.  What makes the Dupont performance encouraging is that profits came from strong sales rather than from cost cutting.

Europe Climbing

Meanwhile, European equities posted positive gains for the sixth consecutive day.  UBS AG and Germany’s largest bank Deutsche Bank AG handily surpassed expectations.

UBS rode the three month high measure of banking shares to a 10 percent gain. Deutsche Bank rose 5.8 percent, Tompkins Plc, who agreed to sell to the Canada Pension Plan Investment Board and Onex Corp, climbed 5.3 percent.

Philipp Musil of Semper Constantia Privatbank AG in Vienna explained, “I am happy about the figures, which beat really high expectations.  The market is near the top end of the trading range and there’s a new positive feeling about Europe.”  

UBS has seen an inordinate number of withdrawals from its wealth management division.  In the second quarter, withdrawals amounted to 8.1 billion francs compared to 15.4 billion in the first quarter.  The wealth management division posted a pre-tax profit of 1.13 billion francs.  

UBS silenced its critics and caught analysts by surprise by turning around its investment banking division.  The division generated 3.07 billion francs from trading equities, currencies, bonds and commodities in the second quarter. 

Switzerland’s biggest bank reported a net gain of 2.01 billion Swiss francs ($1.91 billion) year to date.  One year ago, the bank posted a loss of 1.4 billion francs.

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Euro Cuts Raise Concerns

At the June G-20 summit in Toronto, it was decided that countries would pursue necessary budget cuts to reduce sovereign debt.  The U.S. insisted that the member nations continue to pursue growth as part of a successful formula to end the recession.  The growth-trim controversy was the key discussion at the Toronto summit.

While the participants agreed to the concept, they returned home to unleash austerity cuts with little concern for growth.  The avoidance of a strategy to grow alongside the debt reduction has spread beyond the euro zone as Britain, Brazil and India have joined the parade.

On Tuesday, China expressed concern that the euro zone cuts would greatly affect the country’s export balance.  The U.S. has expressed the same concern ever since Greece needed assistance to meet its obligations.

In Monday’s after trade quarterly reports, IBM and Texas Instruments announced lower than expected results.  The surprise announcements sent tremors thought European markers and sent the Nikkei to a 1.2 percent loss as European equities fell for a fifth straight day.

Earlier in the day, the euro had crossed the $1.30 mark and was holding at $1.3029.  Nervous investors seemed to doubt the currency’s ability to handle the results of the stress tests to be revealed on Friday.  The euro was trading at $1.2851 when U.S. markets opened but the slide looked to be continuing.

Director of research at Forex.com, Jane Foley, explained, “We’ve seen risk appetite claw back a fair amount and the market is questioning whether that move is valid.

China Speaks

On Tuesday, China’s Ministry of Commerce spokesperson, Yao Jian, said that the country’s export business would fall as a result of the cuts in he euro zone.  China has enjoyed stellar gains in the first half of 2010.  

In June, exports increased 43.9 percent in year-over-year comparisons and 48.5 percent in May comparisons.  However, imports also rose dramatically and nearly nullified any growth in GDP.

 Yao said that second half export growth would fall to about 16.3 percent yielding a 24.5 percent rise in GDP.  That rise is modest by 2009 comparisons, but wages have been increased in certain areas and the Ministry of Commerce mentioned these changes are detrimental to the export-import ratio.

 According to the International Energy Agency, China has replaced the U.S. as the world’s energy consumer.  China challenged the report saying that Beijing was aggressively pursing replacement of outdated manufacturing plants.

Yao said China is expecting to begin new construction projects to meet the country’s rising consumption expenditures.  With newly increased wages, demand for products has also increased and China will see a significant rise in internal sales.

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Forex European Preview 09.07.2009

The Euro Zone Sentix Investor Confidence indicator is expected to print at -13.7 in September, showing pessimists outnumber optimists by the narrowest margin since in 14 months. The metric hit a record low in March and has tracked European equities higher ever since, now showing a hefty 92.3% correlation with a Morgan Stanley index reflecting the average performance of EZ-based stock exchanges. Interestingly, it appears that the formation of major tops and bottoms in equities have preceded similar developments in the Sentix by about one month, meaning price action had shaped investors’ outlook as presented in the survey rather than the other way around. To that effect, it would appear that the reading offers little insight into the future direction of risk appetite and so is unlikely to make a lasting impression on currency markets.

Asia Session Highlights

New Zealand’s House Prices advanced for the fourth consecutive month, adding 0.7% through August according to Quotable Value (QV), a government valuation agency. In annual terms, prices fell -2.8% from a year before, the smallest decline in 13 months. QV valuation manager Glenda Whitehead said that, “The housing market is strongly driven by confidence and that appears to be returning.” Indeed, Westpac’s measure of consumer sentiment rose to the highest since the fourth quarter of 2007 in the three months through June. Rising home values may create a perception of growing wealth among property owners, helping to boost consumer spending and by extension spur overall economic growth. New Zealand Finance Minister Bill English has said the economy will begin to expand again in the second half of this year. On balance, however, this may prove of little help to the New Zealand Dollar considering the central bank has pledged to keep interest rates low for now, saying they will remain “at or below current levels” until the latter part of 2010.

Finance ministers and central bankers from the Group of 20 nations (G20) concluded a summit in London with a pledge to keep expansionary fiscal and monetary policy in place for as long as need be to ensure the durability of the nascent economic rebound that has been seen over recent months. Most critically, policymakers agreed to some global coordination as countries eventually begin to unwind stimulus measures to limit volatility in interest rate and foreign exchange markets. However, building consensus on such issues as bank regulation and executive compensation is already proving difficult in the absence of imminent economic meltdown, and agreeing on a coordinated plan to withdrawing stimulus seems like it will be more daunting still, threatening sharp swings in government bond yields and the corresponding currencies.

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